The Department of Justice (“DOJ”) must make a decision on Boeing – and fast. It has only until July 7 to take action under the Deferred Prosecution Agreement (“DPA”) it signed with Boeing in 2021. Newspaper accounts disagree on what it will do, with some reporting that federal prosecutors have recommended to their superiors in the DOJ that they indict Boeing, while the New York Times has suggested that prosecutors would prefer to settle with Boeing.[1] In its most recent offer, the DOJ would require Boeing to plead guilty to a fraud charge stemming from the two air crashes in 2018 and 2019 but would permit Boeing to escape a trial (thereby likely reducing the publicity and the reputational damage).[2] The crash victims’ families have characterized this new offer as another “sellout” by DOJ, and a consensus is unlikely to be reached.

Nonetheless, if Boeing does accept the DOJ’s deal, we may wind up with a revised and extended DPA (possibly structured as probation conditions over a period of probation and possibly implemented through the appointment of a special monitor). Of course, Boeing may resist settlement to the extent it perceives a likely Trump victory in November, as the Trump administration authorized an extraordinarily weak DPA in 2021. (One suspects that Trump today will be even less of a fan of indictments for failure to keep better records or ensure law compliance).

Thus, given that there might be a new DPA, or some other probation-like disposition in addition to another modest fine, this post will consider what conditions should be mandated if we are to turn Boeing into a more law-compliant organization. Boeing’s refusal to concede any problems with the 737 MAX suggests that it is willing to accept great risk rather than concede that it failed. Can a DPA cure this? Put bluntly, over their history, DPAs have been characterized by much boilerplate and little real substantive content. Most seem to be drafted using the same cookie cutter. Why? One reason is that prosecutors probably care much more about achieving a conviction than ensuring that the defendant is adequately deterred and restrained. Both sides get what they want from a DPA: They avoid a humiliating loss and save time, and, within limits, each can give its own interpretation of the settlement. But the public interest is often poorly served.

A second problem with the DPA is that any monitor appointed under it has constitutionally limited authority because the “separation of powers doctrine” limits the court’s ability to oversee or interfere with the prosecution’s discretionary authority.[3] Thus, even if the monitor reports clear violations of the DPA to the court, the court can do little, unless the prosecution also wishes to penalize the defendant for these violations.[4] This does not mean that monitors are not useful, but everything depends on whether prosecutors will respond to warnings and reports from the monitor (which inevitably takes time that they might rather spend on convicting new defendants).

Given this assessment, what could make a DPA truly effective and able to deter continuing misconduct by the defendant (without requiring the prosecution to commence a new proceeding)? This post will answer that we need to integrate what we know about corporate governance with the design of the DPA in order to encourage greater law compliance and less risk-taking. First of all, who is the party on whom we most want to focus deterrence? The implicit assumption of most DPAs is that we should be focused on the corporate entity. But the corporation is controlled by its managers, who are not necessarily affected by it paying a large fine. The corporate entity is responsible in theory to its shareholders, but today those shareholders are likely to consist primarily of large and very diversified institutional investors who hold large portfolios that preclude detailed individual monitoring. This implies that we need to focus more on senior management. Possibly we could prosecute managers directly, but that is both risky and difficult where senior management was not directly involved in the crime. If so, how can one deter them without bringing a new prosecution? Traditionally, corporate management was thought to be risk averse because a major scandal could cause managers to lose their jobs. But in recent years, the nature of executive compensation has changed so dramatically that we need to revise our approach to focus more deterrence directly on these managers.

How do we do that? The starting point must be to recognize that today senior corporate management is compensated primarily through stock options, stock grants, and other forms of equity compensation. For example, as of 2021 (the date of the Boeing DPA), 59% of senior executive compensation was paid in equity and only 41% in cash (and the percentage of equity rose to 63% in the case of larger corporations, such as Boeing).[5] Further, the percentage that equity compensation represents of total compensation continues to increase at a rapid rate.

Still, the skeptic may respond: So what? Elementary corporate finance tells us that, once one is paid in stock options and other equity grants rather than in cash, the variance in the expected return increases, making such a person more willing to accept risk. This could explain why Boeing took the risks that it did with its 737 MAX and also why it was slow to admit that there was any operational problem with the airplane that required special training for the pilots who would fly it. The blunt truth was that any requirement of special training of pilots was costly and deprived Boeing of its cost advantage over Airbus. Thus, the core of Boeing’s misconduct was hiding from the FAA the need for special training (because of the new technology used in the 737 MAX). This incentive to hide adverse information (because it will cause a stock price to decline) continues after a DPA is signed. Thus, it does make sense to use a special monitor and have him or her publicly report to the court on the failures by Boeing. But the court cannot today take additional steps or force the prosecution to do more.

Nonetheless, this obstacle can be outflanked in a variety of ways. First, this post has asserted that the motivation to hide adverse information will decline to the extent that we reduce the percentage of total compensation paid in stock options or other forms of equity to senior management. The simplest approach would be to treat the period of the DPA as one in which the use of stock options, related stock awards, and incentive compensation would be barred in the case of senior management. Management would predictably resist, and no suggestion is here made that existing contracts should be voided. Still, allowing a public corporation that has effectively pleaded guilty to a crime that resulted in the deaths of 346 people to continue to compensate employees in a way that will encourage risk taking is much like permitting a heroin addict to obtain parole without addressing his addiction. We can and should regulate the degree of risk-taking encouraged in this context of a corporation convicted of ignoring risk and safety.

It is not necessary to bar all use of equity compensation; rather, the focus should be on the extreme use of equity compensation. Also, our focus should be on the company’s key decision-makers, not everyone. Denying senior management equity compensation for a period of time focuses a meaningful penalty on the party most able to change corporate behavior (i.e., senior management) and can be justified as a short-term preventive restraint.

What else can be done? Here I point to two other areas without seeking to outline a precise system:

A. Whistleblowers. Section 21F of the Securities Exchange Act of 1934 authorizes the SEC to award a significant portion of any SEC settlement (between 10% and 30%) to the first whistleblower or whistleblowers who provide the SEC with information that leads the SEC to a “successful enforcement action” above a specified minimum level. This idea appears to be working well, although the SEC has made relatively few awards. Still, the SEC is only one federal agency, and many forms of corporate misconduct do not truly involve the federal securities laws. Boeing, for example, pleaded guilty to misinforming the FAA, but other companies may cheat on the EPA, FTC, or some other agency. Finally, there are no whistleblower bounties that U.S. attorneys can today award.

Still, a parallel system could be created under a DPA. For example, the defendant company could be required to deposit a specified amount (hypothetically, $3 million to $5 million) with an independent trustee who would advertise that it would pay bounties to those who notified it and the issuer’s audit committee of material information about corporate misconduct that continued during the time period of the DPA. These awards could be relatively modest (for example capped at $100,000 per person) and still be attractive to lower-echelon employees who may know very specific information. Nor should it be a prerequisite that the U.S. attorney or some agency recover a minimum amount. In the case of airline crashes, we are concerned more with the loss of life than the financial recovery. In effect, we would be designing a whistleblower fund that would apply to only one corporation (and its subsidiaries and affiliates). The goal here is to make senior management of the defendant very aware that lower-ranking employees have an incentive to watch them and turn them in for a profit.

Is this permissible given the judicial concern about the separation of powers? The answer should be that the corporation has explicitly consented to such a fund in order to deter future misconduct. Yes, some companies might be less willing to enter into a DPA under this modification, but today the choice for management is much too easy: Take the DPA and run! Nor are the financial costs of such a fund meaningful given that Boeing has already paid several billion dollars to obtain its 2021 DPA.

Predictably, counter-arguments will be raised to this proposal. Some will argue that corporate employees will flee Boeing to other employers. It is not clear, however, that a convicted corporation is the best point of departure for an employee who wants to migrate elsewhere. The employee most motivated to flee the company may be the employee who has the most reason to legitimately fear that his or her conduct will be reported.

B. Clawbacks. Both the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 mandate the use of clawbacks with respect to amounts received by corporate executives engaged in fraud. But to date, this procedure, while mandatory, has been used in only a few cases.[6] Nonetheless, there is a real threat here that should be put to better use. If the DPA were to establish clear procedures for awarding clawbacks (which could assure that whistleblowers would receive a portion of any amount so clawed back if they were the source of the information that led to the clawback), we would have created a deterrent that did not require a criminal proceeding. Also, the DPA could establish an independent trustee or monitor who would make the decision as to whether to bring a clawback proceeding. In this short post, there is no need to discuss the specific procedures, but the basic goal is, again, to put some teeth into the DPA that either the monitor or some other independent trustee could trigger. Again, we can avoid claims that we are interfering with the separation of powers if these procedures are clearly set forth in the DPA and the defendant corporation has consented to them. Just like probation conditions, the goal is to discourage the repetition of the crime.

Conclusion

Little serious thought has been given to how to deal with a corporation that acknowledges its guilt. Radicals want to dissolve it, and conservatives would prefer to allow it to escape with a low-cost DPA. Neither approach is satisfactory. This post asserts that a principal goal of reform should be to shift some of the cost of deterrence from shareholders to senior management. In comparison with managers, shareholders tend to have less culpability and less capacity to affect the firm’s level of law compliance. If senior managers believed that they were subject to a privately created whistleblower system focused on them and able to seek clawbacks, they would be better deterred.

Are such reforms likely? Do not assume that either defendants or prosecutors necessarily want reform if it will make their job more difficult. That sad truth explains many of the problems with weakly enforced DPAs. Still, such a change would serve the public interest.

ENDNOTES

[1] See Mark Walker and Glenn Thrush, “U.S. Weighs Boeing Deal, As Opposed To Charges,” New York Times, June 22, 2024.

[2] See Niraj Chokshi, “U.S. Said To Seek Boeing Guilty Plea To Avoid Trial In 737 MAX Crashes,” New York Times, June 30, 2024.

[3] See U.S. v. HSBC Bank USA, N.A., 863 F.3d 125, 129 (2d Cir 2017); U.S. v. Fokker Services BV, 818 F.3d 733, 744-45 (D.C. Cir 2016).

[4] The facts in U.S. v. HSBC, supra, involve essentially the Second Circuit overruling a district judge who sought to modify the DPA in that case once violations were reported to him by the monitor.

[5] See Boris Groysberg, Sarah Abbott, Michael R. Marino and Metin Aksoy, Compensation Packages That Actually Drive Performance, Harv. Bus. Rev. (January – February 2021).

[6] See Jesse Fried & Nitzan Shilon, Excess Pay Clawbacks, 36 Iowa J. Corp. Law 721 (2011). For one extraordinary case in which a major investment bank clawed back $31 million from an employee who had engaged in insider trading in defiance of corporate policy, see Morgan Stanley v. Skowron, 989 F.Supp 356 (S.D.N.Y. 2013).

This post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.